Oil

Although explorers drilled Mexico's first petroleum well in 1869, oil
was not discovered until after the turn of the twentieth century.
Commercial production of crude oil began in 1901. By 1910 prospectors
had begun to define the Panuco-Ebano and Faja de Oro fields located near
the central Gulf of Mexico coast town of Tuxpán, and systematic
explorations by foreign companies came to supersede the uncoordinated
efforts of speculative prospectors. Mexico began to export oil in 1911.

Article 27 of the constitution of 1917 gives the Mexican government a
permanent and inalienable right to all subsoil resources. The
government's efforts to assert this right produced a lengthy dispute
with foreign oil companies that was not resolved until the companies
were nationalized in the late 1930s. The 1923 Bucarelli Agreements
committed the United States and Mexico to regard titles held by foreign
oil companies as concessions by the Mexican government rather than as
outright ownership claims. In 1925 President Plutarco Elías Calles
decreed that foreign oil companies must register their titles in Mexico
and limited their concessions to a period of fifty years.

Despite disruption caused by the Revolution, Mexico's oil production
peaked in 1921 at 193 million barrels (some 25 percent of world
production), largely as a result of increased international demand
generated by World War I. During much of the 1920s, Mexico was second
only to the United States in petroleum output and led the world in oil
exports. By the early 1930s, however, output had fallen to just 20
percent of its 1921 level as a consequence of worldwide economic
depression, the lack of new oil discoveries, increased taxation,
political instability, and Venezuela's emergence as a more attractive
source of petroleum. Production began to recover with the 1932 discovery
of the Poza Rica field near Veracruz, which became Mexico's main source
of petroleum until the late 1950s.

In 1938 President Lázaro Cárdenas nationalized the petroleum
industry, giving the Mexican government a monopoly in the exploration,
production, refining, and distribution of oil and natural gas, and in
the manufacture and sale of basic petrochemicals. Although Cárdenas
offered compensation, United States oil companies pressured the United
States government to embargo all imports from Mexico in order to
discourage similar nationalizations in other countries. The boycott was
in effect briefly, but the United States government soon pressured the
oil companies to come to terms with Mexico as a result of President
Franklin D. Roosevelt's Good Neighbor Policy and United States security
needs arising from World War II. In 1943 Mexico and the oil companies
reached a final settlement under which the companies received US$24
million (a fraction of the book value of the expropriated facilities) as
compensation. Nevertheless, the oil nationalization deprived Mexico of
foreign capital and expertise for some twenty years.

Mexico's oil output expanded at an average annual rate of 6 percent
between 1938 and 1971. Production increased from 44 million barrels in
1938 to 78 million barrels in 1951. Domestic demand progressively
exceeded output, and in 1957 Mexico became a net importer of petroleum
products. Production rose to 177 million barrels by 1971 with the
exploitation of new oil fields in the isthmus of Tehuantepec and natural
gas reserves near the northeastern border city of Reynosa, but the gap
between domestic demand and production continued to widen.

Extensive oil discoveries in the 1970s increased Mexico's domestic
output and export revenues. In 1972 explorers discovered deep oil wells
in the states of Chiapas and Campeche that showed huge reservoirs of
petroleum extending for 200 kilometers northeast below the Bahía de
Campeche, and possibly in the opposite direction toward Guatemala.
Almost every drilling operation conducted after 1972 struck oil. In 1973
oil production surpassed the peak of 190 million barrels achieved in the
early 1920s. In 1974 Pemex announced additional petroleum discoveries in
Veracruz, Baja California Norte, Chiapas, and Tabasco.

By 1975 Mexico's oil output once again exceeded internal demand,
providing a margin for export. President López Portillo announced in
1976 that Mexico's proven hydrocarbon reserves had risen to 11 billion
barrels. They rose further to 72.5 billion barrels by 1983. López
Portillo decided to increase domestic production and use the value of
Mexico's petroleum reserves as collateral for massive international
loans, most of which went to Pemex. Between 1977 and 1980, the oil
company received US$12.6 billion in international credit, representing
37 percent of Mexico's total foreign debt. It used the money to
construct and operate offshore drilling platforms, build onshore
processing facilities, enlarge its refineries, engage in further
exploration, prove fresh reserves, and purchase capital goods and
technical expertise from abroad. These investments helped to increase
petroleum output from 400 million barrels in 1977 to 1.1 billion barrels
by 1982. Between 1983 and 1991, Mexico's petroleum exports by volume
remained roughly constant at 1.4 million barrels per day (bpd), while
total production increased from 2.7 million bpd to 3.1 million bpd.

The oil sector's share of total export revenue fell sharply from 61
percent in 1985 to 38 percent in 1990 because of higher domestic demand
and lower total output. The volume of exports fell from 1.4 million bpd
in 1987 to 1.3 million bpd in 1990. Oil prices rose briefly to more than
US$35 per barrel in 1990 as a result of loss of supplies from Iraq and
Kuwait, and Mexico's oil export revenues rose significantly to US$10
billion before falling back some 15 percent in 1991. The volume of oil
exports rose slightly to 1.4 million bpd in 1991, then held steady along
with production in 1992, as the oil price fell to below US$15 per
barrel.

By early 1993, both crude oil production and exports had begun to
decline. The drop in exports resulted from both increased domestic
demand and lower total production. For all of 1993, Mexico's oil exports
averaged 1.3 million bpd, 2 percent less than in 1992. Exports fell even
more sharply in terms of value--to US$7 billion--because world oil
prices fell steadily during much of 1992 and 1993. In 1994 Mexico's
revenue from oil exports was more than US$7 billion.

In 1995 the oil sector generated slightly more than 10 percent of
Mexico's export income (down from almost 80 percent in 1982). The United
States bought 54 percent of Mexico's crude oil exports in 1991, Western
Europe bought 25 percent, and Japan bought 11 percent. In mid-1993,
heavy Maya crude accounted for 67 percent of total oil exports, the
lighter Isthmus crude accounted for 20 percent, and the high-quality
Olmeca type accounted for 13 percent.

In 1995 Mexico was the world's sixth-largest producer of crude oil.
In the Western Hemisphere, only the United States produced more oil than
Mexico. Directly behind Mexico was Venezuela, which in 1992 produced an
amount equal to 89 percent of Mexico's crude oil output. The oil
sector's share of overall GDP rose slightly from 5 percent in 1985 to
more than 6 percent by 1992. In 1993 petroleum provided nearly 30
percent of central government revenues. Oil output rose steadily from
2.5 million bpd in 1989 to 2.7 million bpd in 1991, partly in response
to the Persian Gulf crisis. Production held steady in 1992, then began
to decline in early 1993. Mexico consumed 61 million tons of oil
equivalent in 1992. Its total petroleum consumption amounted to 1.8
million bpd in 1992.

For the first ten months of 1995, total mineral production (including
oil) contracted by a modest 1 percent. For all of 1995, oil production
fell to an average of 2.6 million bpd from 2.7 million bpd in 1994.
However, oil output in the first quarter of 1996 increased by 6 percent
over the first quarter of 1995 to an average of 2.8 million bpd.

In 1993 Pemex operated seven oil refineries with a total capacity of
more than 1.5 million bpd, the eleventh largest in the world. Mexico's
average annual oil refining capacity grew steadily from 63 million tons
in 1983 to 84 million tons in 1990. The country's largest oil refineries
in terms of refining capacity were those at Salina Cruz (330,000 bpd)
and at Tula (320,000 bpd) in the state of Hidalgo. Other refineries were
located at Cadereyta (235,0900 bpd refining capacity), Salamanca
(235,000 bpd), Minatitlán (200,000 bpd), Ciudad Madero (195,000 bpd),
and Reynosa (9,000 bpd).

By the early 1990s, some 40 percent of Mexico's crude petroleum
output was refined domestically. The government invested heavily to
increase the capacity of existing refineries and construct new ones in
order to retain within Mexico the maximum possible amount of value added
in processing crude petroleum. In the early 1990s, financial
difficulties prevented Pemex from expanding refinery capacity along with
demand, forcing Mexico to consume more of its oil output internally and
also to import oil. Petroleum imports rose from 2 billion liters in 1991
to almost 5 billion liters in 1992. Fuel oil imports rose from less than
3 million tons in 1991 to almost 4 million tons in 1992.

During the 1980s, Pemex constructed national pipeline distribution
systems for crude and refined petroleum products and for natural gas. In
1989 an oil pipeline across the Tehuantepec isthmus opened to carry
550,000 bpd of Maya crude petroleum to Salina Cruz on the Pacific for
export to the Far East. Two enormous petrochemical complexes were being
built at Pajaritos and La Cangrejera in Veracruz to supply raw materials
for manufacturing fertilizers, detergents, acrylic resins, polyester
fibers, emulsifying agents, and other petroleum products.

In 1993 Mexico had the world's eighth largest crude petroleum
reserves, amounting to some 5 percent of the world's total. Its proven
crude oil reserves amounted to some 51 billion barrels in 1993, and it
had potential reserves of some 250 billion barrels. The Gulf of Mexico
contains approximately 56 percent of Mexico's proven reserves; 24
percent are located in the Chicontepec region, 15 percent are located in
Tabasco and Chiapas, and the remainder are elsewhere. Mexico's reserves
are sufficient to guarantee current production levels for fifty years.

Since the nationalization of the oil industry in 1938, the
state-owned Pemex has monopolized the production and marketing of
hydrocarbons. For decades the government tolerated Pemex's waste and
inefficiency because the company produced nearly all public revenues.
Problems mounted, however, as a result of Pemex's poor administration,
low productivity, overstaffing, and corruption. By the late 1980s,
Mexico's economic recovery had come to depend heavily on reform of the
state oil sector.

After becoming president, Salinas moved swiftly to modernize and
reorganize the oil industry. He began by breaking the power of the oil
workers' union, which had contributed to Pemex's overall inefficiency by
forcing the hiring of tens of thousands of unnecessary workers. In
January 1989, Salinas had the union's notoriously corrupt chief, Joaquín
Hernandez Galicia (nicknamed La Quina), arrested on weapons and murder
charges. He was subsequently convicted and received a thirty-five-year
jail sentence. Salinas then ordered Pemex to monitor and account for its
internal finances. To reduce expenses, the company began massive
employee layoffs, slashing its workforce by 94,000 (some 44 percent of
the total payroll) by mid-1993.

In April 1992, natural gas from a Pemex pipeline leaked into the
Guadalajara sewer system, triggering an explosion that killed more than
200 people. The tragedy underscored Pemex's bureaucratic unwieldiness
and lack of public accountability. Following the explosion, Salinas
accelerated the organizational restructuring of Pemex. The restructuring
resulted in the company's division in 1992 into four subsidiaries:
Pemex-Exploration and Production (E&P), Pemex-Refining, Pemex-Gas
and Basic Petrochemicals, and Pemex-Petrochemicals. Each unit became a
semiautonomous profit center, directing its own budget, planning,
personnel, and other functions. The subsidiaries deal with each other on
the basis of formal contracts and market-based transfer prices. The
governing board of each subsidiary is composed entirely of public-sector
officials.

Pemex's new focus on profitability and cost-cutting allowed the
company to save US$50 million in 1990, US$70 million in 1991, and US$100
million in 1992. Moreover, Pemex reduced its total labor force from
210,000 workers in 1989 to 116,000 in 1992, with more dismissals
expected later. A new collective contract permitted the company to seek
the lowest bidder for maintenance, transport, slop oil disposal, and
other work formerly reserved for the official oil workers' union.
Pemex's new focus on efficiency and productivity also cleared the way
for previously unthinkable foreign involvement in Mexico's oil sector.
Several United States oil exploration companies received permission to
drill under contract in Mexico, and foreign partnerships were
authorized.

In August 1993, it became known that the government was considering
proposals to allow private companies to buy, sell, and distribute
imported gasoline, natural gas, and petrochemicals, and to invest in new
pipelines. Although the government reiterated in 1992 its longstanding
pledge not to denationalize the oil industry, some observers viewed the
reorganization of Pemex as a move to improve the company's efficiency
and profitability as a prelude to privatization. Denationalization would
require amending the constitution of 1917, which mandated state
ownership and exploitation of hydrocarbons.

During 1995 Pemex proceeded with its plans to divest its secondary
petrochemicals plants and allow private investment in the storage,
transportation, and distribution of natural gas. In late 1995, Pemex
began to divest itself of sixty-one petrochemical plants.

In early 1996, the government unveiled its Program for the
Development and Restructuring of the Energy Sector. The program
estimates the minimum investment required by the petroleum sector by the
year 2000 to be 250 billion new pesos (at 1995 prices). The private
sector is expected to provide 49 billion new pesos of this amount. The
plan is intended to increase Mexico's petroleum exports, improve its
competitiveness in the international energy market, and contribute to
more balanced regional development.